Pasture Cools

Mike Fritz

Sat, 2007-09-01 12:00

Robust demand for recreational tracts, strong livestock profits and high grain prices continue to fuel the strong bull run in the pasture and rangeland

Robust demand for recreational tracts, strong livestock profits and high grain prices continue to fuel the strong bull run in the pasture and rangeland market. U.S. pasture values climbed an average 16% to $1,160/acre this year. That's off considerably from last year's torrid 22% pace, but well ahead of this year's 13% rise in cropland values.

Since the start of this decade, pastureland has been the sweet spot in farm real estate: Pasture prices have risen an average 11.8% annually, easily outperforming cropland's 9.2% pace. Stocks — as measured by the broad S&P 500 Index — have earned a paltry 1.5% annually from the start of 2000 through July.

Pasture's fat gains aren't being ignored. In April, members of the Newport Beach, CA-based Hasso family, an investor in senior housing and shopping centers in the Southwest, rolled $26 million from a 1031 tax-deferred exchange sale of senior housing complexes into the purchase of Hopkins' Ranches, a 29,341-acre expanse of pasture tracts in California's Fresno, Merced and Modoc Counties. The family also owns a 5,500-acre ranch next to Hopkins' Fresno County land.

In June, former media mogul Ted Turner paid $9.6 million for the 26,332-acre McMurtrey Ranch in northwest Nebraska's Cherry County. Turner now owns more than two million acres in Colorado, Kansas, Montana, Nebraska, South Dakota and Oklahoma.

Ranchland pricing has become increasingly tied to per-capita wealth growth, the booming recreational market and speculation as opposed to farming returns, observes Walt Richburg, national director of JP Morgan Farm and Ranch Management in Fort Worth, TX. Non-ag influences now account for an average 66% of the value of farm real estate in 39 states (excluding New England, Hawaii and Alaska), according to an analysis by Kansas State University.

With recreational buyers less focused on land's underlying economics, rent-to-value yields on pasture have shrunk to 1% today, from 1.5% five years ago. Declining rates of cash returns to land historically have occurred during the latter stages of land market price booms. Indeed, the slumping housing market and tightening credit market are expected to temper demand for recreational property.

Livestock to drive demand

But just as non-agricultural demand appears to be cooling for pasture tracts, demand from livestock producers is expected to pick up — thanks to the ethanol-driven grain market. Some market participants also look for the easing drought and strong cattle market to encourage producers to begin rebuilding their beef-cow herds, which would further stimulate pasture values and lease rates.

Above average rainfall across Texas and Oklahoma has spurred renewed optimism. Texas ranchland values rose 18% to $1,329/acre for the 12 months through June. That is well off the 27% annual pace for June 2006, according to a Federal Reserve survey.

“As long as there's no significant negative happening in the economy, ranch pricing will probably continue to increase,” says Merrill Swanson, a San Antonio appraiser and executive council member of the American Society of Farm Managers and Rural Appraisers.

Across most of the Plains, high crop and livestock prices and a receding drought fueled a 16% second-quarter year-over-year gain in ranchland values. Buyer demand appeared strongest in Nebraska, where ranchland was trading at an average $634/acre in June, up 20% from the prior year.

Tough in the Southeast

But parched conditions in the Southeast — especially in Alabama, Georgia, Mississippi and Tennessee — are forcing herd liquidations and steep hikes in forage prices. In North Georgia's Walker County — which is 20 inches behind its normal 56-in. annual rainfall — the first hay crop produced one-third of the usual 2½-ton/acre yield, says Tim Dean, a local purebred Angus producer and appraiser with AgGeorgia Farm Credit.

The shortage of pasture grass and hay has pushed hay prices to $185/ton, double last year's level. Still, the drought hasn't affected local pasture values. That's because recreational demand from urbanites in Chattanooga, 20 miles south, and Atlanta, 100 miles north, has already pushed land prices well beyond ag-use values. Pasture tracts of at least 200 acres are trading for $3,000 to $5,000/acre and higher, and appreciating at a 5% to 6% annual rate, Dean figures.

Looking forward, land-market experts expect rising grain prices will continue to support higher land values. Long-term grain and land-price patterns show that a 1% change in the price of corn results in a 1% change in the value of land. “If grain prices go up, we put that right into land values,” says Kansas State University economist Kevin Dhuyvetter.

“In the past, pasture and crop ground have generally appreciated at the same rate,” Dhuyvetter says. “It's only been in the last five years that pasture has outpaced cropland. Pasture will continue to keep up with cropland values, and maybe even outpace it if hunting and recreational demand continues.”

Mike Fritz, owner of Mercator Research LLC, in Monona, WI, is editor and publisher of Farmland Investor Letter®, a monthly subscription newsletter providing farmland market insight and intelligence for farmland investors and managers. He can be reached atm_fritz@charter.netor visitwww.farmlandinvestorletter.com.

2007 Pasture Values and Lease Rates

Value ($/Acre)

Cash Rent ($/Acre)

Region/State

2007 Value

1-year change (%)

3-year change4 (%)

5-year change4 (%)

2007 Rent

1-year change (%)

Northeast:

3,450

13.1

12.7

10.5

31.00

19.2

Maryland

8,500

2.4

15.6

19.4

New Jersey

12,100

3.4

4.5

4.5

New York

1,020

14.6

9.6

8.4

Pennsylvania

3,300

33.1

18.2

12.9

30.00

20.0

Other States3

6,380

28.6

15.5

12.2

Lake States:

1,800

17.6

19.7

15.2

30.00

7.1

Michigan

2,570

19.5

12.6

12.1

Minnesota

1,380

20.0

25.4

19.1

19.00

0.0

Wisconsin

2,100

16.7

20.5

14.9

40.00

5.3

Corn Belt:

2,010

20.4

18.8

13.9

31.50

1.6

Illinois

2,500

22.0

31.1

19.4

35.00

2.9

Indiana

2,500

19.6

12.0

9.9

Iowa

1,800

28.6

26.9

18.8

39.00

2.6

Missouri

1,820

17.4

17.2

13.2

26.00

0.0

Ohio

2,820

17.5

10.3

8.7

Northern Plains:

469

15.0

18.9

13.5

14.00

12.0

Kansas

740

15.6

19.8

13.1

14.50

5.8

Nebraska

420

13.5

15.2

11.4

14.00

12.0

North Dakota

300

15.4

17.5

12.7

12.50

10.6

South Dakota

420

13.5

20.5

14.9

13.80

7.0

Appalachian States:

3,900

13.4

21.0

15.3

22.30

1.4

Kentucky

2,600

13.0

19.3

12.5

North Carolina

5,100

10.9

16.8

12.5

27.00

8.0

Tennessee

3,850

9.4

16.3

11.3

20.00

0.0

Virginia

5,500

12.2

25.2

21.2

21.00

5.0

West Virginia

2,100

11.7

17.9

13.4

Southeast:

6,500

13.0

44.6

28.3

22.30

11.5

Alabama

2,450

14.0

19.9

13.5

19.50

5.4

Florida

8,350

11.3

54.8

33.8

24.00

9.1

Georgia

8,150

11.6

40.3

26.7

25.00

0.0

South Carolina

3,000

17.6

14.5

11.4

Delta States:

2,170

20.6

18.6

13.2

19.50

11.4

Arkansas

2,130

20.3

17.9

13.1

Louisiana

2,160

20.0

17.0

11.2

23.00

21.1

Mississippi

2,230

20.5

20.6

14.6

18.00

12.5

Southern Plains:

1,290

25.2

27.4

17.7

8.80

7.3

Oklahoma

900

18.4

23.7

15.7

9.50

11.8

Texas

1,370

26.9

27.9

18.0

8.30

2.5

Mountain States:

689

18.0

31.6

20.3

6.20

55.0

Arizona1

900

20.0

21.6

14.9

Colorado

800

0.0

19.4

14.3

5.50

37.5

Idaho

1,850

13.5

36.7

21.5

Montana

850

21.4

43.8

27.2

6.50

30.0

Nevada1

720

16.1

40.4

23.6

New Mexico1

350

27.3

27.2

17.7

2.00

0.0

Utah1

1,350

16.4

37.4

23.2

12.00

9.1

Wyoming

480

33.3

26.9

18.0

4.50

0.0

Pacific States:

1,730

29.1

19.3

13.9

17.30

19.3

California

2,820

30.6

20.8

15.0

14.00

7.7

Oregon

630

16.7

10.3

7.4

Washington

700

15.7

9.0

6.5

National Average2

1,160

16.0

22.3

15.0

12.00

11.1

Data is based on the National Agricultural Statistics Service June Area Survey, conducted during the first two weeks of June. Land value estimates are as of Jan. 1 for each calendar year.1Excludes American Indian reservation land.2Excludes Alaska and Hawaii.3Includes CT, DE, ME, MA, NH, RI and VT.4Average annualized change.Source: Farmland Investor Letter analysis of USDA data.

Top 10 Values in U.S. Pastureland

Region/State

2007 Value ($/Acre)

2007 Rent ($/Acre)

Price/Rent Ratio

Income Yield (%)

North Dakota

300

12.50

24.0

4.2

Nebraska

420

14.00

30.0

3.3

South Dakota

420

13.80

30.4

3.3

Iowa

1,800

39.00

46.2

2.2

Kansas

740

14.50

51.0

2.0

Wisconsin

2,100

40.00

52.5

1.9

Missouri

1,820

26.00

70.0

1.4

Illinois

2,500

35.00

71.4

1.4

Minnesota

1,380

19.00

72.6

1.4

Louisiana

2,160

23.00

93.9

1.1

National Average2

1,160

12.00

96.7

1.0

Worst 10 Values in U.S. Pastureland

Region/State

2007 Value ($/Acre)

2007 Rent ($/Acre)

Price/Rent Ratio

Income Yield (%)

Florida

8,350

24.00

347.9

0.3

Georgia

8,150

25.00

326.0

0.3

Virginia

5,500

21.00

261.9

0.4

California

2,820

14.00

201.4

0.5

Tennessee

3,850

20.00

192.5

0.5

North Carolina

5,100

27.00

188.9

0.5

New Mexico1

350

2.00

175.0

0.6

Texas

1,370

8.30

165.1

0.6

Colorado

800

5.50

145.5

0.7

Montana

850

6.50

130.8

0.8

National Average2

1,160

12.00

96.7

1.0

Data is based on the National Agricultural Statistics Service June Area Survey, conducted during the first two weeks of June. Land value and cash rental rate estimates are as of Jan. 1, 2007. Income yield is gross rent yield before property taxes, insurance and other expenses.1Excludes American Indian reservation land.2Excludes Alaska and Hawaii.Source: Farmland Investor Letter analysis of USDA data

Pasture cash rents bloom

Pasture cash rents jumped an average 11% this year to $12/acre. That's more than double last year's 4.8% increase. Demand for pastureland appears strongest in the Mountain States and California, where USDA estimates that pasture leases spiked 55% and 19.3%, respectively.

In the Mountain States, an acute shortage of pasture brought on by a persistent drought has spurred competition for grass, says James Hastings, an appraiser in Cheyenne, WY. Lease rates are steady at anywhere from $16 to $25/animal unit month (AUM), rising across the state from west to east as the amount of deeded land increases, says Arnold Altaffer, an area chief appraiser with Farm Credit Services of America in Casper.

In California, ranchers report a growing shortage of native rangeland as pasture increasingly competes with vineyards and other permanent crops.

“Almonds and pistachios are encroaching from the valleys into dry native pasture in the low-lying foothills,” says Tony Toso, an appraiser and cattleman in Hornitos, CA. Depending on the location, dry rangeland with good livestock facilities that can support a 500-lb. stocker steer on 3-5 acres will fetch $25 to $30/acre for the October through May grazing season, Toso says.

Across the country's midsection, rising cattle-feeding costs are expected to put further pressure on pasture rates. Based on grain futures prices through 2010, cattle feeding costs are expected to increase 60% to 70% above the average from 1997 to 2006. Cattle producers could bid pasture rents up as much as 50% over the next three to four years compared to 2007 rates as a substitute for these higher feed costs, estimates Kevin Dhuyvetter, a Kansas State University economist. If pasture rates don't rise by this amount, producers will likely come out ahead by leaving cattle on grass longer before they move to the feedlot.